5 Reasons Your SME Loan Application may be Rejected
For small business owners, availing a working capital loan may not always be a cake walk. Granted, today there are numerous new-age avenues that owners of small businesses can approach for quicker, more convenient and easier loans than ever before. However, there are still times when a borrower is refused a loan and he is given no clear indication of why the loan has been declined. Receiving coherent feedback can prevent him from repeating past mistakes and help him prepare better the next time. Here are some of the key reasons why loan applications are rejected by lending institutions.
1. Poor CIBIL score: Your CIBIL Score is an indicative score that is generated from your credit information report. This score plays a key role in your loan application process and ranges from 300 to 900. Any score above 750 is considered a good credit score. Reasons for poor credit score can include lack of adequate financial history, not paying bills on time or even using a single credit card for all transactions. A credit history of fewer than six years can also affect your score. It is important that you are up to date on what your credit score is and experts recommend checking it once every 3 or 6 months. With healthier credit habits and timely payment of bills, you can improve your credit score with time.
2. Delay in meeting loan repayment obligations in the past: Your past borrowing behaviour is a great indicator of how you will behave with future lenders. Lenders are keen to check how you have repaid loans in the past. Ensure than loan repayments are always done on time. In case of defaults in repayment, try and pay off pending payments on existing loans before you apply for a new one.
3. Low Business Vintage: Just like building a personal credit score, a business too must have a financial background to accumulate enough data for a lender to be able to evaluate the risk involved in servicing a particular business. Your business must at least be older than 3 years to be eligible for a considerable loan from a formal credit lending facility.
4. Fluctuating revenue: Another factor that could prevent your business from access to working capital loans is if the company’s month-on-month revenues vary too much. Lenders ideally prefer to lend to a company that is able to sustain a similar income month-on-month since consistency is an indicator of financial stability within the company. Stable revenues also alleviate the risk factor involved in lending to SMEs that do not have too much other financial data to offer.
5. Financial discipline issues: Practicing healthy financial habits is a great way to show a lender that you are a risk-free bargain. Ensure that you have adequate balancing for encashing any cheques, pay your credit card bills on time, repay loans and pay your EMI (instalments) at the designated time to exhibit good financial discipline. A lender is inclined to lend to somebody with robust financial practices.
